A whipsawing stock market and the potentialfor higher tax rates depending on the outcome of the presidential election has put a spotlight on the tax advantages of stock loss harvesting.

Harvesting is among the best tax moves for wealthy clients in this time of any year, but especially in 2020. “Waiting until year-end shouldn’t be this year’s planning strategy,” said Jeff Neher, a CPA at Cordell, Neher & Company in Wenatchee, Wash., and a financial professional at Avantax Wealth Management. “Market swings of recent months make loss harvesting a great move now.”

In this pandemic, values on individual stocks and even sectors can vanish and reappear fast. In March, the Dow plunged almost 9,000 points in about three weeks before rebounding some 4,000 points before the month ended. April saw a rocky rise of nearly 4,000 points before plunging 900 over the next few days. Though the market trend remains generally upward, there’s no guarantee that growth in value will continue in any direction during the rollercoaster news cycle of a global virus. Tax planning needs to somehow account for this.

Tax-loss harvesting is selling a security at a loss, which is then used to offset capital gains incurred on another investment. The strategy, which resembles rebalancing, can figure big during periods of high market volatility.

“Selling a stock at a loss can be helpful for tax purposes, especially for those taxpayers who have investments that they sold at a gain,” said Gail Rosen, a CPA in Martinsville, N.J.

“If you are holding securities with unrealized losses [in non-retirement accounts], you may want to consider selling them and then replacing them with other securities that you consider undervalued,” added John Vento, a CPA/CFP at Comprehensive Wealth Management in New York and a financial professional at Avantax Wealth Management. “This will allow you to harvest some tax losses while the market is low, and then you can defer the gain on the replacement securities you purchased at the lower prices.”

You can offset capital losses not only to capital gains but also to capital gain distributions from mutual funds, plus an additional $3,000 against ordinary income, Vento added.

Taxpayers should review whether they want to offset a long-term gain that would be taxed at a favorable tax rate. For example, Rosen said, long-term capital gains are taxed at 0%, 1% and 20%, plus the possible net investment income tax. “Good planning would suggest that you might want to avoid netting a tax loss with a gain if your long-term gain is being taxed at 0% or even at the 15% bracket,” she said.

Loss harvesting can figure in many scenarios in an up-and-down market, such as stock options.

“To get the lowest tax rate possible, manage both the exercise of the incentive stock options and the sale of the stock,” said Kim Bourne, a CPA/CFP at Playfair Planning in New York and a financial professional at Avantax Wealth Management. “If the underlying value of a corporate executive’s stock has dropped, now is the time to exercise the incentive stock option and pay the tax.”

Clients need to beware of selling a stock and replacing it with a similar investment—a potential violation of the “wash sale rules.” The rules “do not allow reinvestment in the same stock or mutual fund that generated a loss 30 days before and 30 days after the date of sale,” said Maureen Aebi, tax manager at Sikich in Akron, Ohio.

“Although the loss can’t be claimed on a wash sale, the disallowed amount is added to the cost basis of the new stock,” Rosen said. 

Exchange-traded funds can skirt wash-sale rules in that they tend to be similar but technically not identical, investing and tax experts say.